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Protect Your Retirement Plan with Internal Controls

Effective internal controls and annual “self-audits” are important to help protect an employer’s retirement plan against costly errors that can cause the plan to lose its tax-qualified status. Internal controls are policies and procedures that are put in place to avoid errors from occurring and also to detect errors so that they can be corrected before the cost of correction becomes unmanageable. The objective is that with adequate internal controls an employer can be reasonably assured that the retirement plan is operating as it should be – that is, consistent with the terms of the plan document and in accordance with applicable law. If a retirement plan fails in either respect, the plan may be disqualified with all of the adverse tax consequences that a disqualification entails. See 401 (K) Plan Disqualification for our FAQs on disqualification, which includes a brief description of the consequences of disqualification.

This article, which describes the need for and advantages of effective internal controls, focuses on internal controls that help to ensure that the form of the plan document is qualified. Among the suggestions are:

  • Know what kind of document you have – individually designed or pre-approved.

  • If it is individually designed, obtain a favorable determination letter.

  • If it is not possible to obtain a determination letter, or you can no longer rely on the determination letter, consider getting an opinion of counsel that the document is qualified.

  • If the document is pre-approved, make sure that you can rely on the document provider’s advisory or opinion letter.

  • Know when your document must be amended.

  • Consider appointing an employee to make sure that the plan document is up to date and that plan amendments are communicated to all relevant parties.

  • Keep copies of all signed plan documents, amendments, determination letters, advisory or opinion letters and opinions of counsel.

If you have questions or concerns about your plan document and whether it is up to date, Boutwell Fay offers a document review service that employers can utilize to identify and resolve plan document issues. Please feel free to contact any of our attorneys to discuss the program.

Benefits of Having Effective Internal Controls

In order to qualify for self-correction under the IRS’s Employee Plans Compliance Resolutions System (EPCRS), a plan must have established practices and procedures reasonably designed to promote and facilitate compliance – both with respect to the form of the plan document and plan operations. See Section 4.04 of Rev. Proc. 2016-51. Under self-correction, plan sponsors are permitted to correct certain qualification failure without approval by the IRS. For more details, see Self-Correction of Operational Defects in a Qualified Retirement Plan.

Also, when a plan is under examination by the IRS, an employer that can show it has effective internal controls in place can limit the scope of the examination conducted. If internal controls are present, the revenue agent is more likely to keep the examination focused and more limited. When qualification errors are discovered during an examination, the strength of the internal controls is one factor that the IRS will consider in determining the sanction amount in any closing agreement that is negotiated to correct failures that are discovered. See Section 14.02 of Rev. Proc. 2016-51.

The two principal forms of internal controls for a retirement plan are procedures to ensure:

  1. That the plan document is up to date for all law changes and changes to the way the plan is operated; and

  2. That the plan is operated consistent with the written terms of the plan document.

This article focuses on those controls that relate to the plan document. Subsequent articles will cover internal controls relating to plan operations.

Plan Document Updates

In order to keep a plan document up to date, the plan sponsor should understand the type of plan document it has elected to use. Is it an individually designed plan or is the document a pre-approved plan document? If the plan is individually designed, then the employer should have obtained a favorable IRS determination letter with respect to the document.¹ A favorable determination letter is a letter issued to the plan sponsor that expresses the opinion of the IRS as to whether the form of the plan document satisfies the requirements for qualification. Obtaining a determination letter is important because it provides the employer with reliance that the plan is qualified and the related trust is exempt from tax. Generally, if the employer follows the terms of a plan document that has a favorable determination letter, the plan will satisfy the legal requirements for qualification in operation.

Note that the IRS has recently announced that it will no longer issue determination letters except for new or terminating plans. For a plan that does not have a determination letter (or a plan that has been modified in a way that limits the employer’s ability to rely on a previously issued determination letter), the employer may want to consider obtaining an opinion of counsel with respect to the plan. IRS officials have stated informally that such an opinion will be considered an internal control that will be taken into account in determining the amount of any sanction imposed under a closing agreement to correct a failure to keep a plan up to date.

Employers with individually designed plans will need to check in periodically (preferably, on an annual basis) with their document providers to determine when compliance amendments are required. Under recently issued procedures, the IRS will publish on an annual basis a list of changes in retirement plan qualification requirements called the Required Amendments List. In addition, the Required Amendments List will establish amendment deadlines for individually designed plans. On December 27, 2016, the IRS issued the first such Required Amendments List in Notice 2016-80. It provides that December 31, 2018 is the plan amendment deadline for qualification changes listed in the 2016 list.

A pre-approved plan is a plan document that has been issued an IRS letter (either an opinion or advisory letter) approving the terms of the document. Pre-approved plans are either prototype plans or volume submitter documents. A prototype document generally includes a basic plan document with non-elective provisions and an adoption agreement with elective provisions that the employer selects. The IRS will issue an opinion letter to a prototype plan document provider if the plan document meets the applicable legal requirements. A volume submitter plan is a specimen plan offered by a document provider to employers for adoption on an identical or substantially identical basis. The IRS issues an advisory letter with respect to the form of the volume submitter specimen document. The specimen document offers choices over the terms of the plan and may or may not have an adoption agreement with elective provisions.

Ordinarily, an employer may rely on the opinion or advisory letter issued to the pre-approved document provider. However, if an employer changes the pre-approved plan document beyond what the IRS permits, the IRS may treat the plan as an individually designed plan. If the plan becomes individually designed, the employer may no longer rely on the pre-approved document provider’s opinion or advisory letter.

If a plan document is pre-approved, the employer should know when the plan document will be required to be amended and completely restated. Pre-approved plans are generally required to be restated every six years. For example, April 30, 2016 was the deadline for an employer who maintained a pre-approved defined contribution plan prior to January 1, 2016 to restate the plan.

If a change in the design of a retirement plan (whether individually designed or pre-approved) is desired, the plan sponsor should make sure to contact the document provider to determine whether a plan amendment is necessary and if so, when the amendment must be adopted. Some amendments must be adopted by the employer prior to the date they are made effective. Others can be adopted retroactively.

An employer should consider assigning one or more employees to be responsible for ensuring that the plan document is timely amended and that the plan amendments are communicated to all of the relevant parties. As part of the procedure, the employer can contract with an outside service provider to keep the employer updated on required plan amendments.

To show that a plan is up to date, employers should retain the following documents:

  • Original plan document

  • All subsequent plan amendments or restatements

  • Any adoption agreements (and accompanying basic plan document

  • Any IRS opinion or advisory letter (for pre-approved plan documents)

  • Any IRS determination letter (for individually designed plan documents)

  • Any opinions of counsel with respect to the plan document or amendments

  • Board of Director’s resolutions and minutes related to the plan

  • All of the above for any plan that has transferred assets to or merged into the plan

Employers that are able to produce signed copies of plan documents (including all required compliance amendments) and the related determination, opinion or advisory letters are more likely to avoid having their plan documents scrutinized for required plan language in an IRS examination.


¹ An employer is not required to obtain a determination letter. It will, however, generally establish that the form of the document satisfies the requirements for qualified status, so that a revenue agent examining the plan will not need to review or analyze the terms of the document.

© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of January 31, 2017.

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